Whether it’s your first vacation rental or your twelfth, everybody constantly has the burning question in their mind, “What’s the best vacation rental market out there and am I in it?” I am invariably asked this question and it is usually posed with very little context which leads me to tell the person the best market based on the data I find using STR Insights. Their responses about the market I provide range from, “the taxes there are too high there” to “why would anyone travel there?” People may even point out potential regulations, rising market saturation, or other possible deterrents that may scare folks away from a particular market. Just as everyone has their personal preferences when it comes to pizza toppings, prospective vacation rental investments are no exception. Every investment aficionado most likely believes that real estate investments should not be emotional, but I can assure you that vacation rental investing is naturally an emotional decision and our emotional preferences should be considered and even defined when looking for the “best market.”
So, call this a little investment therapy session, because I’m going to elucidate why you need to calculate emotion into your vacation rental investing with the following three reasons:
All emotion and preferences aside, if you looked for the best vacation rental market in the United States based only on data it would unequivocally be the Poconos in Pennsylvania. I can already hear the outcry from those familiar with the market about the increasing rental township or community regulations often encountered in the Poconos. Although STR Insights indicates that this is the number one vacation rental market based on the cost of acquisition and rental revenue, it may not be the best for you because of the increasing regulations. Most investors flock to markets with few or no regulations, because they are apprehensive of one day waking up and finding out their rental is banned or limited. However, what’s riskier than towns and communities with regulation? Towns and communities with no regulation. No regulation means they haven’t decided yet. My investment strategy is to seek after markets with set regulations in tourist destinations, because the communities are benefiting from the taxes and are less likely to cut that newly found revenue stream completely off. This same principle can apply to the Poconos. Regulation is inevitable, avoid the unregulated areas and seek after the regulated areas, establishing a legal short term rental foundation. Obviously you still need to do your research to assess the longevity of current regulations, but if you don’t want to bother with this then markets like the Poconos, despite the outstanding numbers, are not the markets for you.
2. Market Saturation
On the flip side of the coin, markets with few to no regulations have seen sweeping increases in the number of vacation rentals. In the booming markets of Gatlinburg, Tennessee; Broken Bow, Oklahoma; and Branson, Missouri, the number of active rentals has increased in the last three months between 12%-15%. If you look at the year-over-year numbers, the increase is between 25%-30%! This isn’t surprising when you visit these markets and see the new developments of vacation rental communities being built. If you are concerned about increasing competition and standing out from the crowd, then you need to consider market saturation before investing in these markets. Understanding your comfort level with what I call “the barrier of entry” or in other words, what are the base amenities I need to compete with or exceed the average, is key. You’ll find that in markets with higher saturation, the barrier of entry is significantly higher and may require extra cash to purchase amenities that guests typically expect. Determining your comfort level with market saturation can impact whether it’s worth looking into a particular top market.
If you want to get a reaction out of a vacation rental investor born and raised in the south of the US, tell them the best vacation rental markets are located in the north in states like Michigan and Wisconsin. Better yet, tell them California has some excellent markets that they should look into! You can imagine their reaction, because it probably reflects your own reaction. Even though there are some excellent performing markets in states such as California, Michigan, and Wisconsin, taxes, restrictions, politics, and weather patterns all play into determining which markets are best for us. We all have regions or at least a state where we would prefer to own a vacation rental. When searching for a new vacation rental market, region is one of the first parameters I determine. Where do I want to invest? Because in reality, it isn’t everywhere. I know markets in California such as Oakhurst or Bass Lake have excellent returns because they are near Yosemite National Park, which draws in millions of tourists each year. The Boyne Falls area near the ski resort in Michigan has done well, but do I really want to invest in those states? The answer is different for each person.
To sum things up, before diving into any “best market,” we really need to define our emotional preferences such as our regulation, market saturation and geographical tastes. Without doing this, we’ll simply end up looking for deals in markets we already know because we lack the confidence to expand our market palate.